Cryptocurrencies and Inflation

In our article, What is the Real Definition of Inflation? we explained that there is a major difference between the the cause and the effect of Inflation and unfortunately both are loosely called “Inflation”. More accurately the cause is “monetary inflation” i.e. an increase in the money supply and the effect is “Price Inflation” i.e. an increase in the cost of goods and services.

Can Cryptocurrencies “Cure” Inflation

Since the dawn of money there has been fear of debasement. In the early years, when gold and silver were the primary forms of currency it was possible that another cheaper metal like lead could be mixed in with the molten gold and because of its near identical atomic weight no one would be the wiser and “poof” there is more “gold” thus more coins to go around. This would result in “monetary inflation” and eventually “price inflation”.

One of the stated benefits of the first cryptocurrency (Bitcoin) was that its supply was not under the control of any individual, organization or government but rather was subject strictly to the laws of mathematics and the limits of computing power. Bitcoins can only be produced by throwing computer power at it and thus it is time and energy intensive. It also had limits built into its algorithm to control the maximum number of bitcoins that can be produced and to make it progressively harder and harder to produce as it got closer to the limit.

So this feature took the “minting” of cryptocurrencies out of the hands of governments and placed it in the hands of entrepreneurs who were willing to expend time, effort, computer power (and thus money) in “mining” bitcoins. Many people believed that this alone would eliminate Bitcoin’s “Price inflation”. But there are other factors involved in the price of Bitcoin. The first is as a new “fad” there was quite a bit of speculative demand driving up the price of bitcoin and this caused some severe fluctuations. Secondly, the limit of the total quantity was designed to put long term upward pressure on bitcoin prices. As more people used as a currency the long-term demand would rise (as opposed to the speculative short-term demand) and thus the price of each bitcoin would increase. Interestingly, that would mean that the value of each bitcoin would increase but the cost of an item purchased with a bitcoin (BTC) would decrease. So the scarcity of the currency would actually be a deflationary force.

What is the Difference Between Bitcoin and Ethereum

After the successful implementation of Bitcoin developers began creating other “Cryptos” with the primary competitor being Ethereum (ETH). You might ask why was another Cryptocurrency necessary? Well, in addition to the fact that promoters simply wanted to jump on the bandwagon and make money, there is a major difference between Bitcoin and Ethereum. The difference has been described as same as the difference between apples and oranges or better the difference between Lions and Sharks. Apples and oranges are both fruit but still serve different purposes. The same is true of Bitcoin and Ethereum. Both Lions and Sharks are the top predators in their respective food chains but they are not in any way interchangeable (a lion wouldn’t last 5 minutes in the middle of the ocean and vice versa).

Although Bitcoin and Ethereum both have a mechanism to reward entrepreneurs who “mine” them, Ethereum has additional code to not just be a currency but to also provide a trusted blockchain platform to build distributed applications. Thus Ethereum is more than a currency it is also a commercial vehicle. So as more developers build applications on Ethereum the demand for it will increase and thus its market value will increase. Of course people can still mine Ethereum and/or buy Ethereum in an effort to capitalize off of this increasing demand.

Benefits of Ethereum vs. Bitcoin?

Ethereum is a blockchain based currency (the same as bitcoin), but it also provides an additional ability to store your logic code in a distributed manner. With this distribution feature no one can manipulate or change your code, so this provides protection against hackers and code theft. Bitcoin provides a similar feature but it is restricted to storing transactions only i.e. no additional code. This bitcoin limitation was purposely included in bitcoin to make it even more secure as a currency. However, Ethereum purposely chose to include this feature to make it less of a “currency” and more of a “platform”. In addition, in deference to their commercial side, it is easier to mine Ethereum than Bitcoin. It currently requires about 10 times more power to mine 1 BTC than 1 ETH. Ethereum also has no limit in Megabytes so applications can continue to be developed. Due to the distributed nature of the platform Apps connected to Ethereum almost never go down and cannot be shut down and can’t be “censored”. Ethereum also has faster transaction times than Bitcoin.

Ethereum has a different method for costing transactions depending on their computational complexity, bandwidth use and storage needs. Bitcoin transactions compete equally with each other. This is called Gas in Ethereum and is limited per block whilst in Bitcoin, it is limited by the block size. Ethereum code discourages centralised pool mining and encourages decentralised mining by individuals.

Ethereum is not viable for large applications because the blockchain would get way too big to house that data in a decentralized fashion. But Ethereum may become valuable for trading or ledgering various things like who owns barrels of oil in route to China. The best reason to invest in Ethereum is a belief that distributed smart contracts will offer significant business benefits over more conventional forms of cloud computing and transaction-clearing. There are many Fortune 500 companies who have entered the Enterprise Ethereum Alliance including AMD, Deloitte, Infosys, ING, Pfizer, Samsung, Shell, and Scotiabank that are all currently exploring ways to use Ethereum within their product lines.